The General Ford Motors Corporation (GF Motors) is considering developing one of two new car designs. The
Question:
The General Ford Motors Corporation (GF Motors) is considering developing one of two new car designs. The Vector is a radically designed hybrid between a pickup and SUV. The Trek is a more conventional mid-size SUV design. GF Motors assumes both designs would generate sales for the next 10 years. Both designs would sell for $25,000. Estimates for the design and development costs, first-year production costs, and first-year demand are given below.
The production and selling price would rise with inflation (estimated to be 5% per year with a standard deviation of 1.5%). Demand in future years will be forecast to be equal to the previous year’s demand with a standard deviation of 10% of the forecast.
GF Motors uses a 10% hurdle rate (i.e., the discount rate in calculating NPV) when evaluating new projects. Which car design should they pursue, if any?
Quantitative Methods for Business
ISBN: 978-0324651751
11th Edition
Authors: David Anderson, Dennis Sweeney, Thomas Williams, Jeffrey cam